2001 Ruling 2001-0105443 - Reclassification of MFT Units

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CCRA.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.

Principal Issues:

1. Whether either the proposed amendments to the supplemental trust indenture governing each mutual fund to create a new series, or the subsequent reclassification of units of some holders to units of the new series (and vice versa) will constitute a disposition?

2. Whether 104(7.1) will apply, which, if it did apply, would deny a deduction under 104(6)(b)?

3. Whether 245(2) should be applied?

Position:

1. No.

2. No.

3. No.

Reasons: These issues have been ruled on previously (e.g. E2000-0045333, E2000-008413, E2000-0005513).

1. With respect to the amendments to the trust indentures in order to provide for the creation of a new series of units of each Fund and for the possible exchange of units of one series for units of the other series, the amendments are not so significant that the trust would be considered to be a new trust. Also, since on any reclassification a unitholder will not be entitled to proceeds of disposition and the units will not be redeemed or cancelled, and since the rights, privileges, restrictions and conditions of each series are substantially the same and the aggregate value of a unitholder's units of the current series that will be given up in exchange for units of the new series will have the same aggregate value as the units of the new series, the exchange will not constitute a disposition of the units of the current series.

2. 104(7.1) is an avoidance provision and has been viewed in similar circumstances as not being applicable. While there will be a difference in the percentage of net income that will be earned by the two series of units, the difference is due solely to a different charge for management services and thus the avoidance of tax is not an issue.

3. There is no misuse of a provision of the Act or abuse of the Act read as a whole.

XXXXXXXXXX 2001-010544

XXXXXXXXXX, 2001

Dear XXXXXXXXXX:

Re: XXXXXXXXXX
Advance Income Tax Ruling

This is in reply to your letter of XXXXXXXXXX in which you requested an advance income tax ruling on behalf of XXXXXXXXXX (Manageco) and the funds listed in Schedule A attached to your letter (the Funds). In connection with your request, you submitted the Master Declaration of Trust dated as of XXXXXXXXXX, a pro forma version of the Funds' Simplified Prospectus, a pro forma version of the Funds' Annual Information Form and examples of Amended and Restated Supplemental Trust Indentures.

To the best of your knowledge and that of the taxpayers involved, none of the issues involved in this ruling:

a) is in an earlier return of Manageco or a related person;

b) is being considered by a tax services office or a taxation centre in connection with a previously filed income tax return of Manageco or a related person;

c) is under objection by Manageco or a related person;

d) is or has been before the courts; or

e) is the subject of a ruling previously considered by the Income Tax Rulings Directorate in respect of Manageco or a related person.

The following terms have the meanings specified:

"Act" means the Income Tax Act (Canada)(R.S.C. 1985, 5th Supplement, c. 1, as amended);

"Adjusted Net Income" of a Fund is the Fund's net income generally after adding back expenses related to a specific series which have not previously been charged during a year to a distribution to all holders of the series;

"CCRA" means the Canada Customs and Revenue Agency;

"Common Expenses" means all of the expenses of a Fund, excluding Series Expenses;

"Criteria" means the criteria established in respect of each series of a Fund by the Trustee from time to time and set out in the applicable supplemental trust indenture where units of each such series may only be held by persons meeting the criteria;

"Declaration of Trust" means the master declaration of trust dated as of XXXXXXXXXX which established the standard terms and conditions applicable to trusts subject thereto and the supplemental trust indenture applicable to each trust which established or continued the Fund, as amended or supplemented from time to time;

"Eligible Fee Programs" means the Investment Dealer sponsored, fee-for-service wrap programs through which it is intended that the Series XXXXXXXXXX Units will be principally offered;

"Fund(s)" means the funds listed in the attached Schedule "A";

"Investment Dealer" means an investment dealer or financial advisor;

"Manageco" means XXXXXXXXXX;

"XXXXXXXXXX Series Units" means the currently outstanding units of each Fund;

"Series Expenses" means in respect of any particular series of a Fund, the expenses of such Fund for the relevant period that are referable specifically to that series as defined in the applicable supplemental trust indenture;

"Series XXXXXXXXXX Criteria" means Criteria established for Series XXXXXXXXXX Units; and

"Series XXXXXXXXXX Units" means units available to investors who participate in a fee-based program with their dealer. Investors pay an annual fee to their Investment Dealer to participate in the program and such Investment Dealers do not receive trailing commissions from Manageco.

FACTS

1. Manageco offers to the public XXXXXXXXXX including the Funds. Each of the Funds was established by a declaration of trust under the laws of the Province of XXXXXXXXXX and has been continued pursuant to the Declaration of Trust. Each of the Funds is a mutual fund trust within the meaning of subsection 132(6) of the Act. Each of the Funds files tax returns at the XXXXXXXXXX. The Funds reflect a variety of investment objectives.

2. Manageco is the trustee of the Funds. Manageco is a taxable Canadian corporation within the meaning of subsection 89(1) of the Act. The Business Identification Number of Manageco is XXXXXXXXXX. Under management agreements and the Declaration of Trust between Manageco and each Fund, Manageco provides management and distribution services to each Fund for a fee from the Fund and, as such, is responsible for providing or arranging for the day-to-day business administration of the Funds.

3. Under its Declaration of Trust, each of the Funds is currently authorized to issue one class of units and each Fund is permitted to create and issue an unlimited number of series of units, the attributes of which are determined by Manageco at the time of creation and set out in the supplemental trust indenture for each Fund. Currently, each Fund has issued only XXXXXXXXXX Series Units .

4. If a meeting is held, each unitholder is entitled to one vote per unit at all meetings of the Fund except at meetings of a separate series. If a series of units is affected differently than the other series of units of a Fund, the affected series are entitled to vote separately as a series.

5. Unitholders purchasing XXXXXXXXXX Series Units of the Funds may either pay a negotiable front-end sales charge to their investment dealer at the time of purchase or pay a deferred sales charge if their XXXXXXXXXX Series Units are redeemed within XXXXXXXXXX years from the time of purchase. In addition, Manageco may pay the investment dealer a trailing commission based on a percentage of the value of XXXXXXXXXX Series Units of a Fund held by a unitholder.

6. The XXXXXXXXXX Series Units of the Funds are offered for sale by prospectus to Canadian residents, including retail and institutional investors.

7. The management fee charged by Manageco pursuant to the management agreement between Manageco and each Fund is a specified annual percentage of the average daily net asset value of the XXXXXXXXXX Series Units of each such Fund. The total management fees payable by the Funds range from XXXXXXXXXX annually. The management fees paid by the Funds are accrued daily and paid monthly at XXXXXXXXXX of the annual rate.

8. To encourage holdings of Fund units by groups, such as group registered retirement savings plans, defined contribution pension plans, groups of investors receiving services, including investment selection services from a third party provider, and by other large investors, Manageco occasionally negotiates a reduction of the effective management fee payable by such large investors. The goal of such reduced fee arrangements is to achieve fees that are competitive for such large holdings. Such fee reductions are fully negotiable between Manageco and the particular investor and are based, among other factors, on the size of the holdings of the investor or group. Manageco reduces the effective management fee payable by such investors in a Fund by reducing the management fee it charges to the particular Fund on the condition that the Fund makes a special distribution to the investor in an amount equal to the amount of the management fee reduction negotiated with the investor. Such distributions are referred to as management fee distributions.

9. Under its Declaration of Trust, each Fund is required to distribute at least annually to its unitholders the amount, if any, by which its net income and realized capital gains (net of any realized capital losses of the Funds in such year or prior years) exceeds any non-capital loss of the Fund and certain adjustment amounts to be determined by Manageco, including those in respect of taxable dividends received by the Fund from taxable Canadian corporations and capital gains realized by the Fund (in particular, the non-taxable portion of such gains and any capital gains refund to which the Fund may be entitled), each computed in accordance with the relevant provisions of the Act.

10. XXXXXXXXXX Series Units of each Fund are issued or redeemed at their net asset value. At any time, the net asset value per XXXXXXXXXX Series Unit of a Fund is computed by dividing the total net asset value of the Fund (which is the value of assets less liabilities of the Fund as calculated in accordance with the Declaration of Trust of each Fund) by the total number of XXXXXXXXXX Series Units of the Fund outstanding at that time.

11. The Declaration of Trust for each Fund provides that, commencing with the offering by the Fund of units of another series, units of a particular series of a Fund may be reclassified as another series of units of the same Fund if the unitholder of the particular series of units subsequently satisfies the investment criteria of another series of units and requests this reclassification. At the time of such reclassification, the aggregate net asset value of the particular series of units of the Fund and the aggregate net asset value of the series of units into which they are reclassified will be equal. However, since only the XXXXXXXXXX Series Units are outstanding, this reclassification feature has not been used.

12. The Declaration of Trust for each of the Funds provides that if there is more than one series of units outstanding, any Series Expenses will be borne by that particular series. Any other expenses incurred by a Fund will be borne proportionately by all unitholders of the Fund as Common Expenses. This distinction has not been meaningful since only XXXXXXXXXX Series Units are outstanding. Once additional series of units of the Funds have been issued, this result will be achieved by way of the determination of the net asset value of each series of units of the Fund and will impact the allocation and distribution of income and taxable capital gains, if any, of the Fund to unitholders in accordance with the provisions of the Declaration of Trust for each Fund.

13. The net asset value per unit of a series of a Fund is computed by dividing the total net asset value of the series (calculated in accordance with the Declaration of Trust of each Fund) by the total number of units of the series of the Fund outstanding at the time. The net asset value of each series of a Fund is the value of that series' proportionate share of the Fund's assets less the series' proportionate share of the Fund's liabilities common to all series of the Fund and less liabilities of the Fund specific to that series. In general, a series' proportionate share of the Fund's assets and liabilities (other than those liabilities specifically allocated to the series) is determined by reference to the proportion that the total net asset value of the series (adjusted for applicable transactions and cumulative series' liabilities attributable to such series) bears to the aggregate net asset values of all series of the Fund (adjusted for applicable transactions and cumulative series' liabilities attributable to all series) as at the close of business on the previous day. As only XXXXXXXXXX Series Units are outstanding, that series is allocated 100% of the assets and liabilities of the applicable Fund.

14. The portion of the distribution to which a series of units of a Fund is entitled is determined by taking its proportionate share of the Adjusted Net Income of the Fund less the expenses of the Fund that are Series Expenses and any management fee distributions to unitholders of that series of units, in each case not previously charged during the year to a distribution to all holders of that series. As only XXXXXXXXXX Series Units are outstanding, that series is allocated 100% of the assets and liabilities of the applicable Fund. Once Series XXXXXXXXXX Units are issued as described below, the amount of distributions per XXXXXXXXXX Series Unit will likely be different than the amount of distributions per Series XXXXXXXXXX Unit. A series of a Fund will generally be entitled to a distribution on liquidation equal to that series' proportionate share of the net assets of the Fund less expenses of the Fund attributable to that series.

15. In addition, the Declaration of Trust for each Fund provides for the creation of additional series of units, the rights, privileges, restrictions and conditions of which will be determined by Manageco and may include reclassification rights which will be similar to those described above.

PROPOSED TRANSACTIONS

16. Manageco proposes to offer more than one series of units of each Fund. Initially, Manageco proposes to amend the supplemental trust indenture for each Fund to create Series XXXXXXXXXX Units for each Fund. Following these amendments, Manageco proposes to offer Series XXXXXXXXXX Units for each Fund pursuant to a simplified prospectus.

17. Series XXXXXXXXXX Units will only be offered to unitholders who satisfy the Series XXXXXXXXXX Criteria. It is intended that the Series XXXXXXXXXX Units will be principally offered to unitholders who participate in Eligible Fee Programs. Under Eligible Fee Programs, a unitholder pays periodic service fees to the unitholder's Investment Dealer for ongoing financial advice rather than a fee for each transaction.

18. It is intended that Manageco will not pay trailing commissions to Investment Dealers on Series XXXXXXXXXX Units. As a result, Manageco will have lower distributions costs for the Series XXXXXXXXXX Units than for the XXXXXXXXXX Series Units and therefore will be in a position to charge a lower management fee to the Fund for the Series XXXXXXXXXX Units. It is anticipated that the total management fee for Series XXXXXXXXXX Units payable by the Funds will range from XXXXXXXXXX%.

19. Other than the rights, privileges, restrictions and conditions described above, the rights, privileges, restrictions and conditions of the Series XXXXXXXXXX Units will be substantially the same as those of the existing XXXXXXXXXX Series Units of each Fund.

20. Commencing with the offering of Series XXXXXXXXXX Units of each Fund, certain holders of XXXXXXXXXX Series Units will have the right, but not the obligation, to reclassify their holdings into Series XXXXXXXXXX Units. At the time of such reclassification, the aggregate net asset value of the XXXXXXXXXX Series Units of the Fund to be reclassified and the aggregate net asset value of the Series XXXXXXXXXX Units into which they are reclassified will be equal. A unitholder will not be entitled to proceeds of disposition upon any reclassification and the reclassified units will not be redeemed or cancelled upon any reclassification.

21. If a unitholder no longer meets the investment criteria of Series XXXXXXXXXX Units of a Fund, then the Series XXXXXXXXXX Units of that particular Fund held by the unitholder will, at the option of Manageco, be reclassified into XXXXXXXXXX Series Units of such Fund, unless the unitholder meets the investment criteria for another series of a Fund, in which case the Series XXXXXXXXXX Units of the particular Fund may, unless otherwise directed by the unitholder, be reclassified as units of that series of such Fund. At the time of such reclassification, the aggregate net asset value of the Series XXXXXXXXXX Units of the Fund to be reclassified and the aggregate net asset value of the series of units into which they are reclassified will be equal. A unitholder will not be entitled to proceeds of disposition upon any reclassification and the reclassified units will not be redeemed or cancelled upon any reclassification.

PURPOSE OF THE PROPOSED TRANSACTIONS

22. The purpose of the proposed transactions is to permit Manageco to more effectively market the Funds to different segments of the investor market and to tailor the fees and expenses applicable to such segments by offering separate series of units of each such Fund.

RULINGS

Provided that the preceding statements constitute a complete and accurate disclosure of all the relevant facts, proposed transactions and purposes of the proposed transactions, and provided that the proposed transactions are carried out as described above, our rulings are as follows:

A. The proposed amendments to the supplemental trust indenture governing each Fund to create Series XXXXXXXXXX Units as described above will not result in existing unitholders of such Fund being considered to have disposed of their existing units of the Fund;

B. Unitholders whose XXXXXXXXXX Series Units of a Fund are reclassified as Series XXXXXXXXXX Units of that same Fund, as described in 20 above, will not be considered to have disposed of their units by virtue only of such reclassification;

C. Unitholders whose Series XXXXXXXXXX Units of a Fund are reclassified as XXXXXXXXXX Series Units of that same Fund, as described in 21 above, will not be considered to have disposed of their units by virtue only of such reclassification;

D. The implementation of the proposed transactions will not result in the application of subsection 104(7.1) of the Act so as to prevent the Funds from claiming a deduction under paragraph 104(6)(b) of the Act;

E. The amount of Fund income (including taxable capital gains) that is paid or payable to a unitholder in a taxation year will be included in computing the income of the unitholder pursuant to paragraph 104(13)(a) of the Act; and

F. Subsection 245(2) of the Act will not be applied to redetermine the tax consequences determined in the other rulings provided herein.

COMMENTS

The above rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R4 dated January 29, 2001 and are binding on the CCRA provided that the proposed transactions are completed by XXXXXXXXXX. These rulings are based on the law as it currently reads and do not take into account any proposed amendments to the Act.

The above rulings should not be construed as providing the CCRA's views on whether the Funds qualify as mutual fund trusts for purposes of the Act.

Notwithstanding the Trustee's power under the Declaration of Trust for each Fund to create additional series of units and determine the rights, privileges, restrictions and conditions thereof, possibly including reclassification rights similar to those described above, the above rulings should not be construed as providing the CCRA's views on whether or not a reclassification of units to any such new series constitutes a disposition.

Yours truly,

XXXXXXXXXX
for Director
International and Trusts Division
Income Tax Rulings Directorate
Policy and Legislation Branch

Attachment

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